Mortgage brokers get paid different amounts of money, depending on which lending channel they consult for mortgage financing on behalf of their clients. Wikipedia states that mortgage brokers in Ontario do not charge a fee if a borrower has good credit. Unfortunately, this is not entirely true and should get corrected.
Mortgage brokers work with a variety of lenders, such as the major banks (think the "big six"), Mortgage Finance Companies (MFCs), credit unions, alternative Mortgage Finance Companies and private lenders. There are two categories of private lenders: regulated and unregulated. For example, Mortgage Investment Companies (MICs) are regulated by section 130.1 of the Income Tax Act (ITA), and private investors are not regulated- they can be individuals, private corporations, etc.
All of the above types of lenders can be placed in three distinct categories that affect the pay scale of mortgage agents and brokers, and whether or not, at the end of the day, a broker fee may get charged. They are as follows:
Prime Lenders - NO FEE.
Prime lenders include a major banks, Mortgage Finance Companies and credit unions. "Prime" means the best possible quality and in the lending world, refers to a borrower's credit score, employment income and loan serviceability (can they pay for the mortgage?) and, in some cases, down payment or total liquidity. If your mortgage application gets approved with any of the above lenders, you are considered a Prime Borrower.
Prime lenders pay mortgage brokers an origination fee, which is another word for commission. Depending on the term of the mortgage (length of time), the compensation to mortgage brokers varies. For example, a one year term will pay less than a five-year term. Since a prime mortgage borrower would likely get approved directly at an institution (without the broker involved), there is usually not a fee charged.
Alternative Lenders - SOME FEES.
Alternative Mortgage Finance Companies service a group of borrowers that often have certain challenges meeting the Prime lending. For example, bruised or damaged credit, inability to service the loan or self-employed income. Whatever the reason for requiring an alternative lender, if you get approved, your broker may charge a broker fee.
Alternative lenders do not pay brokers as much as Prime lenders do on five-year mortgages. Alternative lenders usually only approve shorter loan terms which means less commission for mortgage brokers. Alternative lenders also charge a lender fee of approximately one percent of the total loan amount. This fee is called a "Commitment Fee."
A mortgage broker may charge a fee to either make up the difference in compensation they would have otherwise received from a prime lender or because they carried out the same amount of work. Usually, because alternative loans tend to be more difficult and paper intensive, a broker will charge a fee.
Private Lenders - ALMOST ALWAYS A FEE.
A private lender is the last resort for mortgage financing. A private lender lends to those borrowers who cannot get approved with either a prime or alternative lender. Perhaps the borrower has issues with damaged credit, or there is no income claimed. Maybe a person needs a short term mortgage, or they want all the interest payments deducted upfront. Whatever the reason, if you have to borrow from a private lender, not only may there be a broker fee, but there may also be a lender fee.
Private lenders do not pay mortgage brokers a commission. A mortgage broker will charge a fee for their work. Private lenders charge a lender fee because they are considered "private" investors and are looking to churn quick profit by taking on significantly more risk than any other lenders mentioned above.
Do you have any questions? Please don't hesitate to call or write. I am happy to help you.
Sarah A. Colucci
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929